This is an entirely free service. No payments are to be made. Also send me The Ultimate Guide to Profiting From Derivatives and sign me up for Profit Hunter,a free newsletter that focuses on identifying short term money making opportunities.Download NowSubscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

Kanoria Chemicals: A difficult year

May 21, 2010

Kanoria Chemicals has announced its FY10 results. The company has reported a 14% drop in topline and a 65% fall in profits excluding extraordinary income. Here is our analysis of the results.

Performance summary

Topline for the quarter falls by 13% YoY, led presumably by lower realizations

Operating profits suffer a greater fall of 54% YoY as costs increase at a faster rate than topline

Bottomline declines by a huge 83% YoY during the quarter as interest and depreciation charges add to the woes. Excluding extraordinary income, bottomline turns into the red

Profits for the full year grow 92% YoY on the back of 14% drop in topline. Excluding extraordinary income, bottomline falls 65% YoY

Announces a dividend of Rs 1.5 per share, translating into a dividend yield of 4.7% at the current price

(Rs m)

4QFY09

4QFY10

Change

FY09

FY10

Change

Net sales

1,197

1,042

-13.0%

5,002

4,305

-13.9%

Expenditure

861

886

2.9%

3,854

3,460

-10.2%

Operating profit (EBDITA)

336

156

-53.5%

1,148

845

-26.4%

EBDITA margin (%)

28.1%

15.0%

23.0%

19.6%

Other income

-

-

2

32

Interest (net)

68

57

-16.3%

294

232

-21.1%

Depreciation

95

100

5.9%

383

400

4.3%

Profit before tax

174

(1)

-100.4%

472

245

-48.2%

Extraordinary income/(expense)

(57)

38

(243)

143

Tax

41

24

-40.5%

83

108

30.7%

Profit after tax/(loss)

76

13

-82.8%

146

280

91.6%

Net profit margin (%)

6.3%

1.3%

2.9%

6.5%

No. of shares (m)

56.3

56.3

56.3

56.3

Diluted earnings per share (Rs)*

5.0

Price to earnings ratio (x)*

6.4

(* on trailing twelve months earnings)

What has driven performance in FY10?

Company’s topline for the fiscal has come in lower by 14% YoY. It is perhaps for the first time in quite a few years that the company has suffered a fall at the topline level. While exact details are not available, we believe it could be mainly due to lower realizations. Both the segments of the company, viz. chloro chemicals and alco chemicals, witnessed double digit fall in revenues, thus driving the overall revenues of the company lower. It should be noted that by virtue of the commodity nature of its business, the company lacks pricing power and hence, must have been forced to lower its realizations in sync with the fall in product prices. Going forward however, the situation should witness some sort of improvement.

Segmental break up...

Segment

FY09

FY10

% change

Chloro Chemicals

Revenues

4,577

3,892

-15.0%

PBIT

710

471

-33.6%

PBIT margin

15.5%

12.1%

Alco Chemicals

Revenues

1,474

1,180

-19.9%

PBIT

130

65

-50.1%

PBIT margin

8.8%

5.5%

Normally, one would expect the margins of the company to remain stable irrespective of the business cycle as it works on a pass through model. But that does not seem to be the case as operating margins for the full year have come down by more than 3%, resulting into a 26% fall in operating profits. The key culprits here have been the power and staff costs, which have increased at a much faster rate than the topline and have thus, pressurized margins. Margins should start looking up over the next few quarters as the company churns out more volumes and is also able to enjoy stronger realizations.

Cost break-up...

(Rs m)

4QFY09

4QFY10

Change

FY09

FY10

Change

Raw materials

423

481

13.8%

2,037

1,766

-13.3%

% sales

35.3%

46.2%

40.7%

41.0%

Staff cost

73

86

18.5%

316

333

5.2%

% sales

6.1%

8.3%

6.3%

7.7%

Power and fuel

181

176

-2.8%

749

781

4.3%

% sales

15.1%

16.9%

15.0%

18.1%

Other expenditure

184

142

-22.7%

751

581

-22.7%

% sales

15.4%

13.7%

15.0%

13.5%

Furthermore, with both interest as well as depreciation charges changing at a greater rate than the operating profits, profits have come under more pressure, resulting into a 48% fall in PBT for the full year. The presence of an extraordinary item in the form of forex gains however, has led to a huge 92% surge in bottomline. If one excludes the same, the bottomline has actually suffered a fall of 65% YoY. We believe that since the forex gain is mostly notional and is one time in nature, a correct assessment of profitability could only be obtained by excluding extraordinary items.

What to expect?

At the current price of Rs 32, the stock trades at a multiple of price to book value of 0.6x its expected FY12 book value per share. Although the company has put up a poor performance, we remain confident of the company’s ability to put the bad phase behind it and grow at a good pace in the future. Plus, investors also have the benefit of earning a good 5% dividend yield on the stock. We remain positive on the stock from a FY12 perspective.

COMPARE KANORIA CHEMICALS WITH

OTHER USEFUL LINKS

MARKET STATS

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.